Multi-Layer Profit Sharing and Innovation

In this paper, we measure whether contractual profit sharing (PS) influences firm innovation and, if yes, how. We disentangle PS effects for different and possibly conflicting interest groups within the firm. We exploit the fact that PS schemes rarely cover the workers all together, but more often than not are used at some layer in the corporate hierarchy and not at others. Based on the analysis of a representative sample of Italian rms, the key contribution of the study is to show that the structure of PS plans matters significantly for innovation. While PS for managers is associated with little or no improvement in innovation activity, PS for non-managers spurs the probability of observing innovation by about 5% to 15%. This may reflect different discount factors of employees at different firm layers. We also document how PS effects, particularly for non-managers, change depending on other firm level variables, such as size, unionization, exposure on international markets, the span of managerial control and some characteristics of the workforce. Policy implications are discussed.